Outsourcing: Renegotiation/Restructuring

When Don Borgschulte, managing director of information technology and services, New Century Energies, arrived on the job in November 1996, his mission was clear. He had been hired to ‘fix’ his company’s badly faltering outsourcing relationship with IBM Global Services. He found an ally in Tony Grimaldi, senior project executive, IBM Global Services, who also was new to the relationship. The two men have worked together to turn the troubled relationship around and get it moving forward again.

When Borgschulte and Grimaldi arrived, New Century Energies did not exist. IBM Global Services was a year and a half into a 10-year contract with Public Service of Colorado — Borgschulte’s new employer at the time — to manage the entire IT department, including application and development, distributed services, data center and help desk, and network services. Public Service of Colorado was on the brink of merging with Southwest Pubic Service to create New Century Energies, an electric and gas utility company that serves 1.5 million customers in six states. The company also holds a 50 percent interest in Yorkshire Electric, a distribution company in the United Kingdom. That merger would add new challenges to the ones the men already faced.

Lack of Teamwork

“There were major problems with the way the outsourcing was going,” said Borgschulte. “The day I arrived, I noticed a complete lack of cooperation and trust between the IBM Global Services employees and the information technology function that stayed behind.” Borgschulte attributed many of the problems to the speed with which the original contract was structured. The deal was put together in 90 days.

“That made it very difficult to get any kind of comprehensive agreement in place that served both companies, in my opinion,” he said.

Renegotiation of that contract, however, was not the first item on the agenda. The first task was to improve the cooperation and trust between the two groups. For Borgschulte, that meant regaining the confidence of the information technology and services department and convincing them that their success hinged on IBM’s success and vice versa.

Grimaldi was working on the same issue on the other side of the fence. “The relationship was confrontational,” he said. “We wanted to get that to a teamwork environment.”

Succeeding in that effort was essential, because the problems between the two groups were affecting service. “The two groups couldn’t resolve any problems that came up, whether they were service, contractor or any other,” said Borgschulte. “That had to manifest itself in service problems.” Again, many of those difficulties could be traced back to the original contract, which did not clearly define responsibilities.

Not only did the existing problems need to be resolved, but Borgschulte and Grimaldi needed to pave the way for new responsibilities. An evolution was going on in the desktop and help desk areas, and IBM wanted to improve service in those areas. Moreover, the merger was looming. That carried with it significant service and contractual changes to support the merger.

Bagging Solutions

One of the first things Borgschulte and Grimaldi was establish ‘brown bag’ lunch meetings, where members of the two groups could discuss issues in an informal setting. The early meetings were confrontational.

“Tony and I worked hard to eliminate the animosity,” said Borgschulte. “Over a period of a month or two, the meetings became much more productive. These were the key people in both of our organizations. We knew if we could get that group working together, that would filter down through the rest of the organization, and I think it has.”

Personnel changes were made on both sides of the relationship. Borgschulte replaced some people to lessen the confrontational aspect of the relationship. Grimaldi brought in people with different and better skill sets in relationship management. He also added personnel to upgrade the skills in the customer services area, which the two men were trying to improve. Early on, they also added some metrics to measure how the customer services and distributed services were meeting the demands of the customer. “That gave us the ability to track our improvements in those areas,” said Grimaldi.

Then Came the Contract

In the midst of this activity, they began working on the contract. “The contract, over the first three or four years, had become stale in certain areas,” said Borgschulte, “and some areas of the contract didn’t work for either one of us.”

They created a joint business plan, which is being executed in 1998. “That business plan encompasses a lot of things, all the way from delivery of service improvements to improvement in working relationships and overall customer satisfaction,” said Borgschulte. “Many of the objectives in our ’98 plan are improvements to the overall relationship for the long term, not just the things we intend to deliver this year. If we’re successful in implementing these objectives, we will have improved the foundation from which we deliver services in the future.”

Asked to grade their progress on a scale of 1-10, Grimaldi offered a score of 6. Borgschulte was a just a fraction more generous, rating their gain between 6 and 7.

“We still have a ways to go,” said Borgschulte. “Basically we have to complete all the activities we’ve outlined in our 1998 business plan. If we can do that and deliver the results that we hope to achieve, I think we’ll be at 8, maybe 9.”

Part of that business plan, Grimaldi noted, was to continue working on the contract, “to reshape it to better fit the evolving New Century Energies as it keeps changing and doing business in a different way.”

That continual reworking of the contract is essential, according to Borgschulte. “We’re in an industry that’s under a tremendous amount of change,” he said. “Sometimes the contract can get in the way. When the contract fails, we just have to go in there and change it.”

Words to the Wise

On that note, both men offered words of wisdom to others who find themselves in similar situations.

“Look for the root causes that created the problems, whether it’s people, process or contracts,” said Borgschulte. “You have to address those at the root cause and eliminate them.”

“Focus on the fact that it’s a long-term relationship and that both sides need to be successful in order for the relationship to succeed,” said Grimaldi. “Therefore compromises will need to be made by both sides to continue to move everything forward. I don’t believe every issue has a win-win resolution. You need to look at it from a business perspective and understand what’s best at that moment and keep the long term in view.”

Borgschulte summed up his feelings on the subject. “If there’s one thing we’ve learned,” he said, “it’s that flexibility is very important. A contract like this just can’t stand on its own for 10 years. I really mean more than the contract. I mean the relationship and the services provided. Technology’s changing, business is changing, nothing is static, so the relationship requires constant attention.”

Lessons from the Outsourcing Primer

In an outsourcing relationship, one party’s success hinges on the success of the other.

Lack of trust and cooperation creates a stumbling block for problem resolution.

Haste in negotiating the original contract can create problems down the road.